Commodity Channel Index (CCI) is a versatile technical indicator that can be used to identify new trends .It is a market indicator used to track market movements that may indicate buying or selling.
CCI = (Typical Price – 14-SMA)/ (0.015*Mean Deviation)
with typical price being (L+H+C)/3; the mean deviation is the average deviation of the 20-period average of typical price; 0.015 is a constant in order to keep CCI between 100 and -100.
How to use:
The CCI compares the current price to an average price over a period of time. The indicator fluctuates above or below zero, moving into positive or negative territory. While most values, approximately 75%, fall between -100 and +100, about 25% of the values fall outside this range
- When the CCI is above +100, this means the price is well above the average price.This indicates that that there is an prevailing uptrend , hence we can go long when the indicator crosses above 100
- When the CCI is below -100, this means the price is well below the average price. This indicates that there is a prevailing downtrend, hence we can go short when the indicator crosses below -100.
Building On Mudrex
As discussed above, lets first write our entry/exit conditions so that we know what to do:
When the CCI is above +100, this means the price is well above the average price. This indicates that there is a prevailing uptrend, hence we can go long when the indicator crosses above 100
BUY: When CCI crosses up +100
When the CCI is below 0, it indicates that the uptrend has exhausted. Hence we can go long when the indicator crosses below 0.
SELL: When CCI crosses below 0.
Final Strategy: The final strategy on Mudrex looks like this
We can now run a quick back-test to see how our strategy performs.
A multiple time frame trading strategy can be created using CCI. An uptrend is indicated if the price is above +100 in the long-term chart and is maintained until the CCI of the long-term chart dips below 0, while one can buy when the shorter-term CCI dips below -100 and then rallies back above -100. The vice versa will give out the downtrend and the sell signals as well.